While the SEC is reviewing the securities' registration statement, registered representatives are very limited as to what they may do with regard to the new issue. During the cooling-off period, the only thing registered representatives may do is obtain indications on interest from clients by providing them with a preliminary prospectus, also known as a red herring. The term red herring originated from the fact that all preliminary prospectuses must have a statement printed in red ink on the front cover stating: "These securities have not yet become registered with the SEC and therefore may not be sold." An indication of interest is an investor's or broker dealer's statement that it maybe interested in purchasing the securities being offered. The preliminary prospectus contains most of the same information that will be contained in the final prospectus, except for the offering price and the proceeds to the issuer. All information contained in a preliminary prospectus is subject to change or revision.


All purchasers of new issues must be given a final prospectus before any sales may be allowed. The final prospectus serves as the issuer's full-disclosure document for the purchaser of the securities. If the issuer has filed a prospectus with the SEC and the prospectus can be viewed on the SEC's website, a prospectus will be deemed to have been provided to the investor through the access equals delivery rule. Once the issuer's registration statement becomes effective, the final prospectus must include:

• Type and description of the securities.

• Price of the security.

• Use of the proceeds.

• Underwriter's discount.

• Date of offering.

• Type and description of underwriting.

• Business history of issuer.

• Biographical data for company officers and directors.

• Information regarding large stockholders.

• Company financial data.

• Risks to purchaser.

• Legal matters concerning the company.

• SEC disclaimer.


The SEC reviews the issuer's registration statement and the prospectus but does not guarantee the accuracy or adequacy of the information. The SEC disclaimer must appear on the cover of all prospectuses. It states: "These securities have not been approved or disapproved by the SEC nor have any representations been made about the accuracy or the adequacy of the information."


Financial relief for misrepresentations made under the Securities Act of 1933 is available for purchasers of any security that is sold under a prospectus that is found to contain false or misleading statements. Purchasers of the security may be entitled to seek financial relief from any or all of the following:

• The issuer.

• The underwriters.

• Officers and directors.

• All parties who signed the registration statement.

• Accountants and attorneys who helped prepare the registration statement.

< Prev   CONTENTS   Next >